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Ownership of Developed Intellectual Property: Is it Possible to Split the Baby? - Part 1

Ownership of developed intellectual property is often a contentious issue between vendors and customers. Customers almost always argue that they have paid for the development and thus should own the created work. Vendors often seek ownership to re-use the developed intellectual property as party of their existing products or as part of a new product as well as to protect the integrity of their product.

To resolve this dichotomy in a logical and thoughtful manner, the parties should discuss how ownership and license rights will work and then draft accordingly. Prior to discussing this issue with the opposing party, each party should meet internally to consider a number of factors that will provide guidance as to the importance of the developed intellectual property. Set forth below are several factors a party should consider when determining the importance of ownership.

For a general discussion, see Porter, Negotiating Rights to a Customer’s Improvements and Modifications, 15 Corp. Couns. Q. 14 (April 1999). For a discussion of the vendor’s point of view, see Gard & Bullock, What’s Wrong With the ‘I Paid For It, I Own It’ Strategy, 23 ACC Docket 23 (May 2005).

1. Factors Influencing IP Ownership of Developed Software

In deciding the appropriate position and negotiation strategy, a party should consider the following elements:

• The level of technical development;

• The level of technological advancement;

• The level of difficulty to develop the technology;

• The ease with which the developed technology can be segregated from existing vendor products and solutions;

• The commercial value of the developed intellectual property;

• The existence of a signed-off business case (including committed investment funds) to re-use the developed intellectual property; and

• The value to be gained by the vendor from re-using the developed intellectual property.

In considering the relative importance of ownership, the vendor should distinguish between developed intellectual property that may be re-used for other customers and developed intellectual property that is created solely for the customer’s environment and is of little or no value to other potential customers of the vendor.

Customers should consider whether the vendor will assign its best technical resources to the project if the customer will own the developed software. Further, will the developed software integrate seamlessly into the vendor’s base code, given that the vendor will most likely not be supporting the code it develops for the customer?

2. Ownership Options

(a) One Party’s Ownership of All Developed IP

The cleanest and simplest resolution to the ownership issue is for one party to own all developed intellectual property. Doing so creates a bright line as to ownership and avoids future disputes over which party owns which aspects of the developed intellectual property. Of course, one party is often unwilling to grant exclusive ownership of the developed intellectual property to the other party, requiring the parties to split the baby in a clear and logical manner.

From the vendor’s perspective, retaining ownership of the developed intellectual property arguably allows the vendor to maintain the integrity of its products and solutions while ensuring their continued improvement and enhancement. Under the vendor’s reasoning, the customer benefits from receiving access to all enhancements and improvements commissioned by other vendor customers as well as reduced maintenance costs from the support of a common product.

Vendors argue that ownership does not benefit the customer, as the customer will likely be unable to independently maintain or support the developed intellectual property and will be forced to pay an additional fee to the vendor or a third party to maintain and support it. Vendors remind customers that the benefits of owning any work product are outweighed by the costs of ownership, including the increased maintenance and support fees arising from exclusive ownership of the intellectual property.

In those situations where the vendor is creating intellectual property that will be part of an existing customer-owned product, the customer will likely demand ownership of the intellectual property and will be unwilling to grant the vendor ownership. In these situations, however, ownership of the developed intellectual property will in all likelihood be of little value to the vendor, and the vendor can concede ownership to the customer.

(b) Ownership Allocated Based on Characteristics of the Software

While most parties focus on an “all or nothing” approach where one party owns all the developed intellectual property, a more productive approach is for both parties to close look at the functionality of the software and determine if it is possible to allocate ownership based on the characteristics of the software and the needs of the parties.

The first step is to review the schematic diagram for the developed software and determine how, if at all, the developed software interacts with the vendor’s solution. For example, the customer may need to pass on certain ownership rights in the developed software to its own customers and cannot do so if the vendor retains ownership of all developed intellectual property. Notwithstanding the parties’ seemingly conflicting interests, the vendor’s desire to protect the sanctity of its product may not be mutually exclusive with the needs of the customer.

Often the parties negotiating the license may not be technically sophisticated and may not realize that they are negotiating over a particular piece of software that has no value to one party. Thus, it is prudent to review the schematic diagram to ensure that each party understands what the vendor is delivering and the importance of each piece of software, such as an API or interface, to each party. Doing so may provide a common ground for determining ownership, allowing the parties to amicably allocate ownership of discrete portions of the developed software utilizing the schematic diagram. For example, the following language grants the vendor ownership of any developed intellectual property relating to the vendor’s core code language while granting the customer ownership of all other developed intellectual property:

Vendor’s Background IP and any new software developed under this SOW which is part of the Vendor’s Platform that requires re-compilation of the software code of the Vendor’s Platform in order for such new software to function, any improvements to any of the foregoing, and all intellectual property rights therein shall be owned by Vendor.

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